All markets are cyclical and the signs are that the world's semiconductor market is poised for an upturn. And that is great news for San Diego based Cymer (Nasdaq: CYMI) -- the world's leading manufacturer of excimer lasers.
Excimer lasers are used in deep-ultraviolet photolithography systems to produce semiconductor chips. Cymer sells its lasers to DUV lithography tool suppliers like ASM Lithography, Canon and Nikon, who in turn supply their tools to semiconductor chipmakers. And these semiconductor chips, made with Cymer technology, are then used in a vast array of electrical devices, including cameras, iPods and computers.
And for once the claim of being the world leader is not hyperbole. Cymer controls a massive 80 percent of the world market and has only one competitor, a Japanese company. So how did Cymer get into this dominant market position? To answer that you need to go back to the University of California at San Diego in the late 1970s when both Cymer CEO Robert Akins and co-founder Richard Sandstrom were working in the laboratories at the cutting edge of excimer laser research. After five years working for a local company on military and commercial applications for the lasers, they decided to strike out on their own and in 1986 founded Cymer.
Excimer lasers are better than the traditional mercury arc lamp models because they reduce the wavelength of light, essentially producing a finer pencil tip that enables semiconductor manufacturers to put more circuits on each semiconductor wafer.
For Akins and Sandstrom it seemed a simple proposition: use their knowledge and contacts with other experts to form a capital equipment company. Looking back, Akins says that naivety and their lack of business experience were actually key factors in their success, noting: "As a more experienced business person I don't think I would have ever started this company."
Although he stresses he wouldn't change a thing, Akins points to the high cost of prototypes of the capital equipment company and the need to use venture capital. Cymer went through about 11 rounds of investment funding.
"You give up roughly 50 percent per venture capital round," Atkins said. "So you go from owning half of the company to a very small fraction of the company."
But that is now a fraction of a very big -- and increasingly profitable -- company. Cymer has a market cap of $1.66 billion and for the year ending Dec. 31, 2005 posted revenues of $383 million and net income of $45.45 million, up 5 percent on the previous year. While revenues were down 8 percent from 2004's total, net income was up 5 percent as a consequence of a push to improve margins.
In a research report in February, Banc of America Securities analyst Mark FitzGerald upgraded his rating from Sell to Neutral, pointing to signs the company could raise its profit margin in to the mid-20 percent range from around 13 percent. He cited cycle time reductions, consolidated infrastructure and increase in prices as margin drivers. The same month, Prudential Equity Group also upped their rating to Overweight from Neutral pointing to same factors.
A key driver of topline growth has been the company's ability to raise its average selling price. Whereas its first laser sold for around $180,000, its top of the range models are selling for about $1 million, a price hike justified because more value is delivered with each generation, Akins said.
Throughout its growth, Cymer has fought to keep up with Moore's Law -- the demand that everything needs to become smaller and faster. And that means working up to 10 years in the future.
"When chipmakers need to ramp up a new generation of chips, the need comes very quickly so that the companies that are fleetest of foot in being able to commercialize the newest technology, deploy and support it in factories that are running 7/24 is really important for our success to date," Akins said.
He points to technical innovation as the biggest factor driving Cymer success.
"Not that many companies today have to invest in technologies that are 10 years out, but for us it is a fundamental part of being ready on time," he said.
Cymer learned the hard way that intellectual property is a vital part of running any technology business. At the company's IPO two of its competitors took IP legal action against the company.
"We dealt with that," Akins said. "But from that date we decided we were going to be the technology patent IP leader in our industry, so we have had a very aggressive focus on intellectual property."
The semiconductor industry has been in the doldrums for the last five years or so after chipmakers overscaled operations in the late 1990s to meet a perceived need in the dotcom era.
But now Akins believes the market is on the up -- and he's not alone. In February SEMI, the industry organization for North American-based semi-conductor manufacturers reported a surge in January's bookings to $1.26 billion, the highest level since November 2004. The same month, analysts Gartner Inc. concluded that the worldwide market will continue to grow, and predicted worldwide revenues of $257.7 billion in 2006, nearly 10 percent up from 2005.
Akins himself is less cautious than the reports, suggesting that the market is on the verge of a "significant upturn" -- particularly for lithography -- due to the strong growth in the consumer electronics sector. To meet an increased demand Cymer is intending to hire more staff. It currently has around 800 employees worldwide and expects to take on another 200 this year.
Akins is erudite and careful in his analysis of the lack of longevity of some high-tech companies, suggesting some "get so focused on what they are doing they lose track of the fact that they are going to run into a brick wall. The wall comes, they hit it, and their life cycle is over."
Keen to avoid that fate, Cymer is actively looking for emerging markets that correlate to the company's strengths and competencies for when the lithography market stops expanding.
One of the key market competencies this process identified was microfabrication, the process of fabricating components on a micrometer scale. In July 2005 Cymer launched a joint venture named TCZ with a German company, Carl Zeiss SMT AG, a leading optical systems supplier. They are seeking to develop new microfabrication manufacturing tools, specifically for the emerging flat panel display market.
Akins is clearly excited about the prospect of taking Cymer down new paths, describing it as a "process of exploration."
"In the early days we knew what we wanted to do, but didn't have any money," he explained. "Now we have money, but surprisingly finding something new to do where you can have a relatively high probability of success, where the company can grow to a size substantially bigger than it is today ... it is a complex process."
He predicts a changed high-tech landscape in 10 or 20 years with some of the old companies gone, and some new giants. And with understated ambition added, "One of the really successful companies 20 years out might as well have the name Cymer as anything else."